Heat's Turned Up in Aaron's Takeover Battle

Activist shareholder seeks to replace board after rent-to-own leader tries to limit buyout bid

Mar 10, 2014 at 2:56PM

Having finally taken up the buyout offer made by Vintage Capital Mnagement, rent-to-own leader Aaron's (NYSE:AAN) is seemingly circling the wagons to make it difficult for any takeover to actually occur.


Source: facebook.com/aaronsinc/.

While management formed a "Transaction Committee" to review the offer, it's still lackadaisically plodding forward as Vintage says several weeks after the bid was proffered it still hasn't been contacted by Aaron's -- all the while the furniture and consumer products rental shop substantially accelerated the deadline for nominating directors at the annual meeting and adopting measures that make it much more difficult for stockholders to hold the board accountable. For example, it increased the number of votes required to call a special meeting of shareholders from 25% to 66.67% of votes. 

As a result, Vintage says it's lost confidence in Aaron's management to make the changes necessary to move the company forward and on Friday announced it was nominating its own slate of candidates to replace the rent-to-own company's board.

Aaron's recently reported fourth-quarter results that were a dreary reminder of the toll the economy is having on business with revenues falling 2% for the quarter. Vintage estimates the company lost 50,000 customers since the beginning of the year alone and the investor says that even its franchisees are disillusioned by the direction Aaron's is taking, noting that its two biggest franchisees, Spencer Smith and Tom Bernau, have agreed to serve as part of the five-candidate slate for the board.

Rival Rent-a-Center (NASDAQ:RCII) is also experiencing a difficult period, reporting 2013 results showing revenue rose 2% but profits were slashed 72%, while Sears Holdings (NASDAQ:SHLD) launch of a rent-to-own program of its own last November at its Kmart division -- just in time for the Christmas shopping season -- did nothing to stem the hemorrhaging of revenue and the near-complete elimination of adjusted EBITDA, which plunged from $429 million in 2012 to just $12 million last year.

As I pointed out when Vintage first announced its takeover bid last month, furniture store revenue as a percentage of total revenues has been on a decade-long skein that's only been exacerbated by a still-weak economy. Even specialty finance companies like EZCORP (NASDAQ:EZPW) and Cash America (NYSE:CSH), which offer financial service opportunities like pawn shops and payday loans to the unbanked and underbanked, are feeling the crunch with EZCORP reporting  revenues were down 1% in the first quarter and profits were off 27%. While that was better than the markets anticipated so its stock jumped on the news, EZCORP's stock is still down 40% over the last 12 months.

Shares of Cash America are also down 20% year over year, but they'd lost as much as a third of their value before regaining some lost ground. The payday loan business has proved far less lucrative and more troublesome than pawn shops and merchandise loans and both Cash America and First Cash Financial will be closing down payday loan operations in Texas after new laws regulating business there were enacted.

It's a curious period where individuals more than ever need access to consumer financial services but are finding restrictions placed in their path. Not that payday loans, pawn shops, and rent-to-own options are in the long-term interest of the consumer, but sometimes and in some cases they can make sense, and individuals should have this avenue open to them. 

When a business like Aaron's is stumbling when it ought to be flourishing makes the case Vintage Capital Management makes and underscores why franchisees might find the takeover an attractive time to buy out management.

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